Wednesday, February 11, 2015

Rite Aid-EnvisionRx: Initial Thoughts on the Deal

With this transformative deal, Rite Aid is now explicitly building a mini-CVS Health. That’s not necessarily a bad thing.

Below, I highlight a few interesting tidbits about EnvisionRx, offer some initial thoughts on the transaction, and provide some preliminary prognostications. Based on what I've heard so far, this deal looks to be a big win for Rite Aid.

Question to ponder: Will this deal trigger a new partnership between Express Scripts and Walgreens Boots Alliance?MEET ENVISIONRX

Here are some highlights from yesterday’s conference call announcing the deal. First, let's look at the numbers.

[Click to Enlarge]

EnvisionRx has had truly impressive growth, especially in the past year. As expected, the Express Scripts/Medco transaction didn't end competition in the market for PBM services. (See 2012’s ESRX-MHS: Analysis of the FTC Decision.)

We’ll learn more about the deal and its implications in the coming months. In the meantime, here are my snap judgments and best guesses.

Rite Aid will soon create its own Maintenance Choice program. CVS Health’s Maintenance Choice program, the most prominent limited network model for commercial plan sponsors, has become the biggest synergy between its retail and PBM segments. The program reduces plan sponsor costs while increasing prescription volume in CVS retail stores. Competing PBMs cannot readily match the Maintenance Choice program, because a separately owned PBM and pharmacy chain would battle over the per-prescription profit. Look for a comparable Rite Aid/EnvisionRx offering by 2016. (For more on these models, see Chapter 8 in the 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies.)

Expect Rite Aid to expand its geographical reach. Narrow network models require retail networks that overlap with a plan sponsor’s beneficiaries. Rite Aid, however, does not have a national retail network. There are a significant number of EnvisionRx clients that are not in Rite Aid’s markets. Rite Aid CEO John Standley is currently president of NACDS—a perfect platform to identify tuck-in acquisitions. Rite Aid has also been actively trying to buy independent pharmacies

Rite Aid now has a legitimate specialty growth platform. Compared to Rite Aid, EnvisionRx has better access to specialty drugs with limited dispensing networks (as discussed in section 3.7.1. of our new report).

The deal is a small win for McKesson. EnvisionRx’s relatively small mail and specialty pharmacies currently buy drugs from AmerisourceBergen. Once the deal closes, EnvisionRx will purchase drugs via Rite Aid’s partnership with McKesson.

Rite Aid’s RediClinic deal makes even more sense. Rite Aid changed its clinic strategy with the 2014 acquisition of RediClinic. At the time of the acquisition, RediClinic operated 30 clinics in the greater Houston, Austin and San Antonio metropolitan areas. Rite Aid has now started opening up clinics in its Baltimore/Washington D.C and Philadelphia stores. It’s another example of how Rite Aid is emulating CVS Health’s MinuteClinic, which remains the largest and fastest-growing retail clinic operator.

In 1998, Rite Aid paid $1.5 billion to buy PBM PCS Health Systems from Eli Lilly. The PBM was combined with Rite Aid’s in-house Eagle PBM. In 2000, Rite Aid sold the business for $1 billion to AdvanceParadigm. The new company was renamed AdvancePCS and sold to Caremark in 2003, which was then acquired by CVS in 2007.

In 2005, Rite Aid partnered with ProCareRe to provide PBM services to employers, health plans and insurance companies. As far as I know, that effort didn’t get much traction.

Given EnvisionRx’s track record and management team, I predict that Rite Aid will break the curse. When there's more meaningful news, I'll ring a fricken bell or something.

DISCLAIMERThe analyses on this website are based on information and data that are in the public domain. Any conclusions, findings, opinions, or recommendations are based on our own experienced and professional judgment and interpretations given the information available. While all information is believed to be reliable at the time of writing, the information provided here is for reference use only and does not constitute the rendering of legal, financial, commercial, or other professional advice by Pembroke Consulting, Inc. or the author. Any reliance upon the information is at your own risk, and Pembroke Consulting, Inc. and the author shall not be responsible for any liability arising from or related to the use or accuracy of the information in any way. Pembroke Consulting, Inc. does not make investment recommendations, on this website or otherwise. Nothing on this website should be interpreted as an opinion by Pembroke Consulting, Inc. or the author on the investment prospects of specific companies.

The comments contained on this site come from members of the public and do not necessarily reflect the views of Pembroke Consulting or the author. Neither Pembroke Consulting nor the author endorse or approve of their content. Pembroke Consulting and the author reserve the right to remove or block comments, but are under no obligation to explain individual moderation decisions.

The public domain use of our materials includes linking to our website. You do not need to obtain special permission to link to the Drug Channels site.

The content of Sponsored Posts does not necessarily reflect the views of Pembroke Consulting, Inc., or any of its employees.